Busi­ness res­cue slow to catch on in SA

Big-name fail­ures may de­ter thou­sands of com­pa­nies that could ben­e­fit, writes Evan Pick­worth

Business Day - - COMPANY NEWS - Pick­[email protected]

Not only was it a fi­nan­cial suc­cess, but from a labour per­spec­tive an­other 180 jobs were cre­ated

EL­DO­RADO Fresh Let­tuce Pro­duc­ers fell on hard times two years ago, but in­stead of clos­ing down and let­ting 150 work­ers go, di­rec­tors Ivo Ru­gani and Steve Lan­g­ley de­cided to take the plunge and use SA’s new busi­ness res­cue law. Their 12-year-old com­pany was at stake, and the di­rec­tors were loath to see their loyal work­force dec­i­mated by a liq­ui­da­tion.

The new Com­pa­nies Act had just ush­ered in rules that looked very sim­i­lar to Chap­ter 11 pro­ceed­ings in the US, adding an ex­tra man­age­ment layer to re­struc­ture a com­pany’s af­fairs and, im­por­tantly, to keep the wolf from the door for a while.

When El­do­rado first sent out a no­tice of the start of busi­ness res­cue pro­ceed­ings, cred­i­tors were sur­prised as the usual prac­tice in SA was sim­ply to sue for pay­ment and, in many cases, get back a few cents on the rand in the event of a liq­ui­da­tion. But cred­i­tors were told to be pa­tient. The com­pany sent them a let­ter say­ing there was a good prospect it would suc­ceed as a go­ing con­cern — but made it clear a mora­to­rium had been placed on their claims. Lawyers who were con­sulted told cred­i­tors to wait it out — this type of pro­ce­dure had saved many com­pa­nies in the US, and they stood to get very lit­tle money out in a liq­ui­da­tion.

Cred­i­tors had a right to be wor­ried, given some high-pro­file busi­ness res­cue fail­ures. Ca­su­al­ties in­cluded 1time Air­lines, where the busi­ness res­cue process failed af­ter just two months, and Sany­ati Hold­ings, the em­pow­er­ment con­struc­tion com­pany that fell out of res­cue pro­ceed­ings af­ter just a few weeks. An­other low-cost air­line, Vel­vet Sky, went into liq­ui­da­tion in 2012 af­ter it failed to con­vince a court it was a can­di­date for busi­ness res­cue.

Fast-for­ward to to­day and El­do­rado’s cred­i­tors are smil­ing — they could lay their full claims against a ro­bust com­pany.

“Not only was it a fi­nan­cial suc­cess, but from a labour per­spec­tive an­other 180 jobs were cre­ated,” says Ravie Goven­der, part­ner and specialist in busi­ness re­struc­tur­ing and in­sol­vency at Ho­gan Lovells (South Africa), the firm that worked on the res­cue oper­a­tion. “If things run smoothly in busi­ness res­cue, com­pa­nies come out of the other end bet­ter,” he says. “The busi­ness res­cue prac­ti­tioner has pumped in skills and re­sources, if the busi­ness res­cue prac­ti­tioner does his job.”

In El­do­rado’s case, for in­stance, the busi­ness plan used in the busi­ness res­cue also en­com­passed tech­ni­cal work on the plant­ing and cul­ti­va­tion of the let­tuce crop.

But com­pa­nies in SA are not yet re­al­is­ing the full po­ten­tial of busi­ness res­cue, es­pe­cially when it comes to sav­ing jobs, says the di­rec­tor of busi­ness res­cue and in­sol­vency at law firm Werks­mans, Eric Leven­stein.

At the mo­ment only 14% of the close to 4,000 com­pa­nies fac­ing liq­ui­da­tion in SA each year are opt­ing for busi­ness res­cue. Mr Leven­stein says the costs are not pro­hib­i­tive, as in liq­ui­da­tions the liq­uida­tor would claim 10% of the money re­ceived whereas tar­iffs for busi­ness res­cue start at R1,250 an hour, depend­ing on the size of the com­pany.

Mr Goven­der also does not think cost is an is­sue. “If they have a good busi­ness model and sup­ply a prod­uct or deliver a ser­vice, a prac­ti­tioner will do a pre-as­sess­ment and de­ter­mine whether it is worth­while from a cost per­spec­tive. The prac­ti­tioner gets paid by the com­pany, but if there is a plan that says the busi­ness will sur­vive, there will be cash for costs like the prac­ti­tioner and other spe­cial­ists,” he says.

The 55% suc­cess rate of busi­ness res­cues is ex­pected to im­prove fur­ther, with some ma­jor suc­cesses be­ing chalked up al­ready. Four months af­ter start­ing busi­ness res­cue pro­ceed­ings, the Moyo chain of restaurant­s was able to se­lect a pre­ferred bid­der to take over the com­pany a few weeks ago.

The busi­ness res­cue of Ad­vanced Tech­nol­ogy & En­gi­neer­ing Com­pany be­came un­con­di­tional in June with the fi­nan­cial and strate­gic sup­port of the Para­mount Group, Africa’s largest pri­vately owned aero­space and de­fence com­pany.

Dis­count fash­ion chain Meltz was placed in busi­ness res­cue in March last year to save more than 250 jobs. Af­ter clos­ing some stores, the com­pany is back on its feet, ac­cord­ing to a com­men­ta­tor spo­ken to.

On Dig­i­tal Me­dia — which owns StarSat, pre­vi­ously known as TopTV — is close to emerg­ing from busi­ness res­cue this month. The busi­ness res­cue be­gan in Oc­to­ber 2012.

A de­ci­sion by the South Gaut­eng High Court last year is ex­pected to bol­ster the case for busi­ness res­cue, as it clar­i­fied the rank­ing of cred­i­tors. The rul­ing makes it eas­ier for a busi­ness res­cue prac­ti­tioner to ap­proach new in­vestors for the com­pany, as they are given pref­er­ence over pre-ex­ist­ing cred­i­tors.

Mr Goven­der says the ef­fect on em­ploy­ment of busi­ness res­cue and liq­ui­da­tion is “chalk and cheese”.

In a liq­ui­da­tion, un­der sec­tion 38(1) of the In­sol­vency Act, em­ploy­ment con­tracts are sus­pended and un­less the liq­uida­tor agrees to re­sume the em­ploy­ment con­tract, they ter­mi­nate af­ter 45 days.

In busi­ness res­cue, he says, em­ploy­ment con­tracts con­tinue, on the same terms and un­der the same con­di­tions, and labour laws are strictly fol­lowed with re­gards to any planned re­trench­ments.

Mr Leven­stein says trade unions con­cerned about a com­pany’s vi­a­bil­ity — and the pos­si­bil­ity of job losses as a re­sult — can ap­ply to court for a busi­ness res­cue to be im­posed.

“This op­por­tu­nity has not, to date, been used by trade unions,” he says, but it “would al­low them … to con­sider the re­ten­tion of jobs within a busi­ness res­cue frame­work.”

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